Financial adviser or soothsayer?

19 July, 2023Gerry Brown
How can advisers plan for potential changes in taxation? Gerry Brown, consultant at QB Partners, explains why it's important for advisers to keep their clients informed and remain flexible when it comes to financial planning. 

A soothsayer is a person who is supposed to be able to foresee the future. compressed money image

In the eyes of their clients, financial advisers and paraplanners are assumed to have this attribute. Advisers, assisted by their paraplanners, look to the future in terms of ensuring that their clients have adequate retirement income, look to the future in terms of inheritance tax planning and look to the future in ensuring that wealth is maintained and passed down to future generations.

Financial planning of this nature requires the soothsaying adviser to keep an ear close to the ground to get an early insight into developing trends.

Nowhere is this more important than in the field of tax, as the tax treatment of investments and investment income can have a very significant impact on the outcome of financial plans.

What will the UK tax landscape look like in the future?

One problem for future Chancellors – regardless of political party – is that receipts from duties on fuel and tobacco are set to decline. The introduction of electric cars and a reduction in the number of smokers have a fiscal impact. Assuming that public expenditure will remain at current levels in real terms or even increase, there will be an inevitable shortfall in tax inflows.

The two main tax ‘earners’ for the government are income tax and value added tax (VAT). The basic structure of VAT hasn’t changed much since its introduction in 1973, although the rates have increased substantially since then. VAT isn’t charged on essentials such as most food and healthcare and is charged at a reduced rate on domestic energy. There are no obvious ways to change the VAT regime to any significant extent.

Income tax has the greater impact on clients’ expectations. It’s the tax with which the client has the greatest interaction – whether that be a deduction from salary under the PAYE system or the completion of an annual self-assessment tax return. Income tax is often used to encourage – or discourage – behaviours.

The current freeze in the income tax personal allowance is, in effect, a stealth tax. There is a widely held view that individuals with income below the national minimum wage shouldn’t suffer income tax. At low levels of income, the interaction of the tax system with the benefits system causes administrative inefficiencies. Of course, very few advisers have clients with income close to the minimum wage but changes to personal allowance could have knock on effects further up the income scale.

Tax on savings income is starting to affect more people as interest rates rise. The various ISA regimes are designed to encourage personal saving. The venture capital regime (the two enterprise investment schemes and venture capital trusts) are designed to encourage investment in small and (hopefully) growing companies. But, will these reliefs continue in their current form?

Are further changes to pension tax on the way?

Perhaps the biggest income tax changes in recent years have been in relation to pensions. Who, ten years ago, would have predicted pension freedom? But can we expect changes to pension tax in the near future?

Ten years ago ‘25% tax free cash’ on retirement was an irrefutable article of faith. Now there is a growing realisation that this aspect of pension tax may be too generous and is deserving of deeper analysis. The Institute of Fiscal Studies (IFS) – an independent research body – has suggested that the tax system treats funds that remain in a pension at death extremely favourably. The IFS has concluded that introduction of ‘pension freedoms’ will lead to more pension wealth being bequeathed at death. This can offer, in many situations, a tax advantage to the deceased’s extended family. While there is no immediate proposal to deny such advantages the soothsaying adviser could tell clients that change is a possibility, and that alternative and additional ways of mitigating inheritance tax might need to be adopted.  

At a deeper level could we see an increase in taxes on capital rather than on income? Inheritance tax is unpopular but in reality, it affects only a small minority of families. What would be the response if clients were offered the alternative of a £25,000 increase in the inheritance tax nil rate band or a £1,000 increase, for 5 years, in the income tax personal allowance? Would the latter prove more popular?

Keeping up to date with tax trends will pay dividends

In every aspect of financial planning flexibility is a ‘must’. The adviser who can keep clients aware of trends in taxation will be able to incorporate such flexibility in planning strategies. The adviser who can tell clients of potential changes will gain kudos and client loyalty – even if those changes are never implemented.

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